Ch 27
It is the money that finances a company in return for a fixed return and includes debentures and preference share capital.
What is Fixed-cost capital?
Interest must be paid even if a company makes a loss, but it is reassuring if the profit before interest, covers the interest payments several times.
What is interest cover?
The process of assessing whether it is worthwhile to
invest funds into a particular project.
What is 'Investment appraisal'?
This is calculated by multiplying the net cash inflow for the year by the discount factor for the year.
What is discounted cash flow?
This includes the equity (ordinary share capital and reserves) plus the fixed-cost capital.
What is total capital?
This ratio is a measure of how confident investors are in the future performance of a company.
What is P/E ratio?
The cost consists of expenditure that has been incurred before a new project has been considered.
What is Sunk cost?
Calculation of this indicates the time over which the
business is at risk.
What is pay-back period?
This ratio shows the relationship between the dividend paid per share and the market price of the share.
What is dividend yield?
The financial directors usually adopt the practice of altering financial data to appear more attractive to investors.
What is 'Window dressing'?
The principle that the same sum of money is worth more now than at some time in the future.
What is 'Time value of money'?
The values of benefits that will be sacrificed if resources are diverted from their present uses to other applications.
What is opportunity cost?
It calculates the interval that occurs between the time a business has to pay its creditors (trade payables) and the time it receives cash from its customers.
What is Working Capital Cycle?
It is fixed-cost capital expressed as a percentage of total capital.
What is Gearing ratio?
The only technique being considered that takes depreciation of the investment into account and concerned with profitability and not the cash flows.
What is Accounting Rate of Return?
Initially calculate the profitability ratio for each project to identify the projects it invests in maximise the net present value of the company over a period of time.
What is capital rationing?
The profit left for the ordinary shareholders aft er interest, tax and preference dividends have been provided for in the income statement.
What are 'earnings'?
When a business increases its turnover rapidly with the result that its inventories, trade receivables and trade payables also increase, but to a level that threatens its liquidity.
What is over trading?
The analysis that indicates the maximum acceptable margin of error
What is sensitivity analysis?
The interest, or discount, rate at which the net
present value of the cash flows from a project
(both positive and negative) equal zero.
What is internal rate of return?